Improving In House Collections Part 3

This is the third article in a series of six, on the challenges companies face with the 1st party billing and revenue process. 

This is a HIDDEN COST that most practices, trades, companies, law firms and even financial institutions face and most never really understand or grasp what this means. 

If you look in the left column, that is the amount of debt column and the % along the top is Net Profit margin. If there is just $10,000 in past due accounts not collected and you had a gracious 10% Profit Margin, you would have to book and get paid on $100,000 worth of new business just to offset for the losses on the $10,000. 

And look at the current column of your aging report. If you do around $25,000 of new business a month, you'd have to do 4 months of extra revenue (and collect every penny) to offset the $10.000 (again, that's with a 10% profit margin)

This might be motivation for a company that has never used a 3rd party to consider making that change or to make a change from an under performing agency that charges a high percentage. 

The average traditional percentage agency in the U.S. collects somewhere between 10% and 19% of the debt assigned and they charge anywhere from 30% to 40% on average. The true cost of collections is the money not collected! 

Do any of these apply to you?

1- The high % charged by traditional agencies has you waiting longer to send them to an agency and extending the internal process.

2- Due to the high contingency fees, you assign accounts well after 120 days.

3- Due to the lack of diplomacy, you wait forever or just don't use a 3rd party at all.

4- You look for the lowest % fee agency, which actually lowers the incentive for the agency to collect or they really don't work small balances and just tell you they are uncollectable. 

SOLUTION

Look at your recovery rate with your agency in balance buckets. What is the recovery rate on balances less than $200 or maybe $500 on commercial debt. What is it on $500 or $1000 and higher.

What you will find is that almost EVERY percentage agency skims accounts. They work the higher balances harder and it's not that the smaller ones are not collectable, it's just not as profitable for a percentage fee agency. 

Turn you accounts to your agency sooner. The younger the account is the higher the recovery rate will be.

You can also look into an agency that charges a fixed fee per account instead of a contingency percentage. That way all accounts are being worked and not just those with higher balances

The recovery rate on those smaller balances can be higher as well. It easier for someone who owes $150.00 to pay than if they owed $1500.00